Question

United Bankshores, Inc. wishes to evaluate three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows: Branch Computer Install Office System Internet Expansion Upgrade Bill-Pay Amount to be invested $579,351 $408,596 $203,492 Annual net cash flows: Year 1 Year 2 261,000 243,000 222,000 191,000 172,000 153,000 117,000 81,000 59,000 Year 3 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0 .592 0.424 0.361 0.284 0.194 100 .558 0.386 0.322 0.247 0.162 Required: 1. Assuming that the desired rate of return is 6%, prepare a net present value analysis for each proposal. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar

Answer 1

Solution 1:

Computation of NPV - United bankshores Inc.
			Branch office expansion		Computer system upgrade		Install internet bill pay
Particulars	Period	PV Factor	Amount	Present Value	Amount	Present Value	Amount	Present Value
Cash outflows:
Amount to be invested	0	1	$579,351	$579,351	$408,596	$408,596	$203,492	$203,492
Present Value of Cash outflows (A)				$579,351		$408,596		$203,492
Cash Inflows
Year 1	1	0.943	$261,000.00	$246,123	$191,000.00	$180,113	$117,000.00	$110,331
Year 2	2	0.890	$243,000.00	$216,270	$172,000.00	$153,080	$81,000.00	$72,090
Year 3	3	0.840	$222,000.00	$186,480	$153,000.00	$128,520	$59,000.00	$49,560
Present Value of Cash Inflows (B)				$648,873		$461,713		$231,981
Net Present Value (NPV) (B-A)				$69,522		$53,117		$28,489

Solution 2:

Computation of Present Value Index
Particulars	Branch office expansion	Computer system upgrade	Install internet bill pay
Present Value of Cash Inflows	$648,873.00	$461,713.00	$231,981.00
Initial Cash Outflows	$579,351.00	$408,596.00	$203,492.00
Present Value Index (PV of Cash Inflows / PV of cash outflows)	1.12	1.13	1.14

Solution 3:

Install internet bill pay offers the largest amount of present value per dollar of investment.